Morgan Stanley Calls For 150% Upside In Ambarella

Following its time with Ambarella Inc (NASDAQ: AMBA) management on a road show, Morgan Stanley raised the bull case for the company to $115, suggesting 152-percent upside. The optimistic expectation is based on the firm getting increasingly excited for computer vision.

As such, the firm has an Overweight rating for the shares of Ambarella, with the price target at $60.

In pre-market trading, shares of Amabrella were surging up 3.68 percent to $47.28.

Analysts Joseph Moore and Craig Hettenbach noted that the company is upbeat about a significant advancement in the state of the art for dedicated CV chips. If the actual product lives up to this potential, the analysts feel the narrative completely changes.

The analysts think this should pave the way for Ambarella to move to a socket-driven niche market company to a leader in a market that has recently emerged as a strategic priority for every company in semiconductors.

Computer Vision: Emerging Opportunity In Semiconductors

CV is processing video images to extract information, with such video analytics key to several of the most important potential growth drivers in semiconductors, especially in driver assistance and eventually autonomous driving.

Morgan Stanley noted that they are also important in several aspects of consumer and industrial IoT, where camera inputs will be used to automate and remotely inform a wide variety of tasks. With software development moving from heuristic development to machine learning, the firm said recent breakthroughs in artificial intelligence "deep learning" will accelerate these technologies.

The firm pointed out that there are only a few dedicated solutions for CV, notably Movidius, which was acquired by Intel in 2016 and Mobileye, acquired by Intel earlier this year. The firm also noted that Nvidia has introduced tailored driving-based solutions, although the chips are based off more general purpose Tegra X2 chips.

Though the firm said it is too early to pick winners, it sees several years of growth for all of these product categories in the vision area. The firm expects dedicated designs to provide the best performance per watt, but to lack the design flexibility of more general purpose approaches. That said, the firm believes dedicated solutions are likely to create significant opportunity.

Challenges Remain

That said, Morgan Stanley referred to the possibility of a long path to CV revenue for Ambarella amid manageable challenges in the core business. Additionally, the firm thinks the stock has quickly discounted the machine vision opportunity.

"Automotive driver assistance/autonomy won't drive revenue for multiple years, but development relationships with Tier one suppliers could be announced in 2018 — it's not our base case, but if that happens, we see substantial upside," the firm said.